What’s a million dollars worth anymore?

A million dollars, courtesy of Jeffrey Putman

A million dollars, courtesy of Jeffrey Putman

Why is it that we have this fascination with getting a million dollars in our bank account?  Besides the fact that we love round numbers, why is it that a million dollars is so important?  The reason I’m asking this is because, while thinking of my goals for the future, for retirement, for getting the life that I want to live, this number keeps standing out.  One Million Dollars.  Over at Budgets are Sexy, J Money has started a little club, with just over 100 members who are trying to become millionaires.  Whenever you read about retirement, whether on Forbes or Bloomberg, you read about the million dollar nest egg.  So, what can I even do with a million dollars?  Would it be enough to retire on?  Let’s run down some numbers and figure out what makes sense.  Is one million dollars the goal?  Is it more?  Could it be less?  How the hell do I even get to a million dollars??

Well, let’s start with the easy one question first: How the hell do you even get to a million dollars? I’ve spoken about this briefly before but I didn’t delve into how long it could actually take.  Let’s look at some basic assumptions and then figure out the timeline with Dave Ramsey’s Investment Calculator.

  • Starting Value of $10,000
  • Annual rate of return of 8.00%
  • Contribution of $400
  • Contribution and Investment timeline of 35 years

If we look at a situation like this, you’ll have saved up just over one million dollars in those 35 years.  But I’m on a bit of a more restricted timeline than that.  I’m 26 and I want to be out of the rat race inside of 11 years!  So, let’s look at a slightly more aggressive timeline.

  • Starting value of $10,000
  • Annual rate of return 10.00%
  • Contribution of $900
  • Timeline of 11 years

$420K.  Damn.  Not even half way.  That’s pretty discouraging.  I adjusted the rate of return up a a little bit because I’m considering that in the future, I will use real estate to get some of my income going and that has a bit higher rate of return (12-14%), so combined with stocks and bonds, I think a 10% returns is possible for this.  But, still, this doesn’t get me to where I need to be!  But let’s think about the above situation.  I’m saving $900 a month.  That’s only 25% of my monthly take home salary.  If I’m able to save 50% of my salary, well, I might get a bit closer!  After 11 years, I’d have saved just under $900K.  Not quite one million but it would definitely be able to take care of my day to day life!  Especially if I’m able to save 50% of my monthly take home, $900K should be able to provide more than enough income from dividends, real estate returns, etc.

But still, what does one million really get me?  Well, the median home price in the US was $221K as of 2012.  So, if we think we’re living a little bit large, this little cash hoard could buy two homes outright: one for living in and one for renting out, providing a good little income stream.  Since I’m not one to want ultra luxury things, it would probably get me a cheap, diesel car as well.  With the rental income from the house, dividend and bond income, I’d have more than enough to survive on and, plus any consulting or freelance work, even save up and grow my nest egg even more.

There it is!  A million dollars isn’t worth what it used to be but it can definitely provide a frugal family with a decent buffer from the rest of the world and maybe even allow them to leave the corporate world behind for more fun things, like kayaking or coaching.

Investing 101 – Dividend Investing

It was brought to my attention the other day that I may have jumped into things before explaining to my readers what everything actually was, especially with dividend investing.  I tend to do that.  I just go off on tangents or talk about things that seem normal to me and are just way off the beaten path for everyone else.  Sorry about that.

So what is a dividend?  According to the all knowing Investopedia, a dividend is a “distribution of a portion of a company’s earnings.”  So when we talk about dividends, we’re talking about the money that we receive on a monthly, quarterly, or annual basis just for owning a share of the company.  For example, may issue a dividend of $0.25 a share a year.  If the stock has a value of $10.00 a share, that means the dividend is a 2.50% return on your money. Better than your savings account!  However, if the stock rises to $50.00 a share, the dividend is now a return of 0.50%.  Better than most savings accounts but not as good as before.

However, this huge capital appreciation doesn’t often happen with dividend producing companies.  You see, companies with dividends tend to be more mature companies with established revenue streams and earnings.  In fact, Standard and Poor’s produces a list of the “Dividend Aristocrats,” a list of companies that have increased their dividend every year for at least 25 years.  These are companies we all know, like AFLAC, Chevron, Target and many others.  These companies are ideal investments for the everyman (or woman) because they have easy to understand products and businesses.  You look at them and you just know what they do!  Even better, their stock prices do not fluctuate as much as others.  Because they are big, blue chip stocks with dividends to their shareholders, they tend to be more stable.  They go up less in the good times and they go down less in the bad times.  They’re an ideal investment for someone who wants better returns than a CD or savings account but is still too risk averse for a tech stock or an early IPO.

So how do we use this knowledge of dividends and what they are to start a dividend investing program?  Well, with dividend stocks, you have two possibilities: you can take the dividends as income or you can reinvest them back into the company tax free.  In dividend investing, you’ll typically do the latter.  Why is this?  Well, it helps your portfolio in two ways.  The first way, and I think the most important, is that you’re taking that 2.50% from our first example and you’re using it to buy more stock in the company, which will produce more dividends which will buy more stock which will produce more dividends etc etc.  Add in the capital appreciation and you can have some serious growth on your hands.  In fact, using the handy dandy dividend reinvestment calculator we are able to see just HOW much this can help.  If we were to invest $10,000 in Aflac in January of 1980 and you chose to not reinvest the dividends, you would have just over $1.4 Million today.  However, if you reinvested the dividends, you would have $1.65 Million.  An extra $250K is nothing to sneeze about when you only put in $10K (if adjusted for inflation, it would be the equivalent of $28K invested today).

The point here is that dividend investing can help build a strong portfolio if you start when you’re young and use your iron nerves to avoid selling the moment you have a miniscule profit.  If you do this, your dividend invest can eventually turn into dividend income for retirement, something everyone wants!

Let me know if there are other topics or subjects which you need explained.  Passing on my knowledge is what this is all about!